Acquisition of The Hartford Steam Boiler Group

Munich Re Group
Acquisition of
The Hartford Steam Boiler Group
Peter Röder
Jörg Schneider
22 December 2008
Munich Re Group
Transaction highlights
3
Products and business model
5
Acquisition rationale
10
Transaction terms and financial impact
19
Summary
23
Munich Re Group – Acquisition of The Hartford Steam Boiler Group – 22 December 2008
Agenda
2
Transaction highlights
Transaction
Offer
A total of US$ 742m paid in cash, equals 1.25x price-to-book multiple1
Structure
Munich Re America will acquire 100% of the outstanding shares of HSB Group Inc.
Funding
Transaction will be fully funded from Munich Re’s internal sources;
Munich Re’s share buy-back programme will not be affected
Conditions to
closing
No material adverse change; regulatory approval in US, Canada and UK
Timeline to
closing
1
Signing on
22 December 2008
Based US GAAP book value (unaudited) as of 30 September 2008.
Regulatory
approval
Closing expected
end of Q1 2009
Munich Re Group – Acquisition of The Hartford Steam Boiler Group – 22 December 2008
Highlights
3
Munich Re Group
Agenda
Transaction highlights
Munich Re Group – Acquisition of The Hartford Steam Boiler Group – 22 December 2008
Products and business model
Acquisition rationale
Transaction terms and financial impact
Summary
4
Products and business model
Corporate structure
Independent business providing highly specialised products and services
Corporate structure
HSB is a highly profitable specialty insurer
and reinsurer providing:
all risk property, contract works, inland
marine and other specialty products;
inspection services and engineering
consulting.
The Hartford Steam Boiler
Inspection and Insurance
Company (HSB IIC)
HSB Group operates in 12 countries. Its
main foreign subsidiaries are HSB-EIL in
UK and BI&I in Canada
HSB
Engineering
Insurance
Limited
(HSB-EIL)
The Boiler
Inspection and
Insurance Co
of Canada
(BI&I)
International
engineering
subsidiaries
Insurance subsidiaries
Non-insurance subsidiaries
Solomon
Associates
The Hartford Steam
Boiler Inspection and
Insurance Company of
Connecticut
Global
Standards
Engineering
subsidiaries
Largely autonomous unit within AIG Group
with strong recognition of own brand
HSB independently manages own claims
and investments, purchases reinsurance
and operates own systems and customer
service infrastructure
Rated “A” by A.M. Best, HSB’s rating
expected to benefit from strong Munich Re
Group rating going forward
Munich Re Group – Acquisition of The Hartford Steam Boiler Group – 22 December 2008
coverage for equipment breakdown (EB);
HSB Group Inc.
5
Munich Re Group
Products and business model
Equipment breakdown insurance
Property covers have standard exclusions
HSB fills this gap in coverage
Mechanical breakdown
Mechanical breakdown, including rupture or bursting
caused by centrifugal force
Electrical arcing
Artificially generated electrical current, including
electrical arcing, that damages electrical devices,
appliances or wires
Explosions of steam boilers, piping,
engines, and turbines
Explosions, excluding combustion explosion, of steam
boilers, steam pipes, steam engines or steam turbines
Loss or damage to steam boilers
An event inside steam boilers, steam pipes, steam
engines or steam turbines that damages such equipment
Loss or damage to hot water boilers
An event inside hot water boilers or other water heating
equipment that damages such equipment
HSB uses multiple distribution channels
Client company business model: Reinsurance assumed from leading US and international
commercial and personal lines insurers and white label arrangements
Direct via brokers and independent agents
Engineering revenues (mainly generated through direct sales to clients)
Munich Re Group – Acquisition of The Hartford Steam Boiler Group – 22 December 2008
Worldwide brand recognition based on Engineering knowledge
6
Products and business model
Business model
Unique business model based on strong relationships
REINSURANCE ORIENTED
Insurance coverage and services fully integrated
into Client Companies products
Long-standing relationships with 15 of the 25
largest commercial insurers
HSB acts as reinsurer with an intensive service
component
Rapid expansion of new strategic products2 to
complement core business
INSPECTION
SERVICES
AND
ENGINEERING
CONSULTING
HSB
INSPECTION SERVICES AND ENGINEERING
CONSULTING Revenues 2007: US$ 172m1
Global presence of 1,200 engineers
Provides critical contribution to HSB’s engineering
knowledge base and experience, enhancing
underwriting decisions and claims prevention
DIRECT BUSINESS MODEL
Gross written premium 2007: US$ 230m1
Agents
Brokers
PRIMARY INSURANCE ORIENTED
Direct Business Model
1 US
2
Large network of independent agents: 6,000 in
US, 4,000 in Canada and 1,000 in the UK
Intellectual capital and best-in-class reputation
supports long-standing customer relationship and
high agent satisfaction
GAAP figures as of 31 December 2007 as reported by HSB.
Equipment breakdown for homeowners and farmowners, identity recovery insurance, data compromise and employment practices liability, and miscellaneous professional liability.
Munich Re Group – Acquisition of The Hartford Steam Boiler Group – 22 December 2008
CLIENT COMPANY MODEL
Gross written premium 2007: US$ 674m1
Client Company Model
7
Munich Re Group
Products and business model
Company profile
Engineering
knowledge
Approximately 50% of HSB’s approx. 2,500 employees have engineering or
technical background
Machinery and
equipment
information
HSB owns one of the world’s largest databases tracking equipment failures
and causes
Risk management
expertise
More than 800 employees hold commissions from the National Board of Boiler
and Pressure Vessel Inspectors
Underwriting
expertise
Highly specialised underwriting expertise in equipment breakdown; major
focus on loss prevention result in lower, less volatile loss ratio
Claims
expertise
In-house expertise enables HSB to adjust majority of claims in-house,
reducing costs and losses and ensuring high level of service
Product
development
Proven ability to design, market and service non-engineering insurance
products as well as new strategic products
Munich Re Group – Acquisition of The Hartford Steam Boiler Group – 22 December 2008
HSB results driven by intellectual capital
8
Agenda
Transaction highlights
Acquisition rationale
Transaction terms and financial impact
Summary
Munich Re Group – Acquisition of The Hartford Steam Boiler Group – 22 December 2008
Products and business model
9
Munich Re Group
Acquisition rationale
HSB acquisition
Ideal strategic fit – Significant value creation
1
Consistent with
US market strategy
US market strategy is an integral part of our Changing Gear growth
initiatives
HSB’s risk management approach and product know-how closely related to
Munich Re’s reinsurance business
2
Expanding in
specialty business
Specialty business is a natural evolution of our business model
HSB has a unique business model providing highly specialised products
and services
3
Strong position in
attractive segment
Market leader in the US and Canada; growing international presence
Significant barriers to entry
Track record of
4 outstanding financial
performance
Strong profitability on a sustainable basis (21.6% average return on
policyholders surplus (“RoPHS”) since 2003) contributing to sound capital1
High-quality earnings driven by superior underwriting performance and
claims management (73.8% average combined ratio since 2003)1
A natural extension of our US market strategy to build a dominant position
in specialty business and deliver growth and healthy underwriting results
1
Munich Re Group – Acquisition of The Hartford Steam Boiler Group – 22 December 2008
Strategic rationale
10
Based on consolidated statutory financial statements.
Acquisition rationale
Consistent with US market strategy
Further realisation of US market strategy goals
Employing a client-centric
approach to develop client
strategies and reinsurance
solutions
Distribution
power
Risk
know-how
Leverage the core
traditional reinsurance:
US market strategy
Risk
capacity
Establishing a dominant position in
the US specialty business,
combining product know-how and
strong distribution capacity
Acquisition of HSB supporting
full leverage of Munich Re’s
global risk know-how
Munich Re Group – Acquisition of The Hartford Steam Boiler Group – 22 December 2008
1
11
Munich Re Group
Acquisition rationale
2
Expanding in specialty business
Low-cyclicality specialty business
Traditional
reinsurance solutions
Large individual
risks solutions
Specialty
commercial
solutions
Personal
specialty
solutions
Standard retail
solutions
B&C
Midland
Risk
know-how
Specialty business
Relatively low exposure to cycle of
traditional P-C reinsurance
Attractive niche not directly competing with
mass market primary insurance players
Exhibits low loss ratios due to
good risk selection and active claims prevention
HSB sets the industry standards in equipment
breakdown insurance
HSB fits in well with Munich Re’s culture of technical underwriting
Munich Re Group – Acquisition of The Hartford Steam Boiler Group – 22 December 2008
Distribution
power
HSB
MRAm
Risk
capacity
12
Acquisition rationale
Strong position in attractive segment
Clear market leader in North America – Growing international presence
Market shares 2007 in North America1
Other
25.0%
Net written premiums 2007 by country2
HSB
34.9%
UK and Other
10%
USA
80%
CNA
4.3%
Travelers
4.9%
Transatlantic Re
6.2%
FM Global
24.6%
Canada
10%
International NWP (2003-2007) CAGR 18.3%
Clear leadership position in the US and Canadian market (35% market share) as well as strongly growing
presence in other countries (predominantly UK)
Limited competition from primary commercial insurers, given the significant barriers to entry
in terms of required engineering know-how and database of products and claims
US client company surveys consistently underscore HSB’s outstanding reputation
and high brand equity
1
2
Based on net written premium for North American equipment breakdown market only (Source: A.M. Best).
Based on US GAAP net written premium as of 31 December 2007 as reported by HSB.
Munich Re Group – Acquisition of The Hartford Steam Boiler Group – 22 December 2008
3
13
Munich Re Group
Acquisition rationale
Track record of outstanding financial performance
4
Continued strong top-line growth
Net written premiums1
US$ m
HSB CAGR 6.0%
North American EB insurance market CAGR 2.3%
669
658
2003
2004
2005
734
2006
803
2007
Above-average top-line growth (6.0% CAGR of net written premiums 2003-2007) resulting from
successfully working through primary insurers to gain access to more business
… however, HSB focus is on earnings: profit over revenue
Additional US$ 172m fee income from inspection services and
engineering consulting
Future new business growth is expected from increasing penetration of
the underserved and underinsured middle and small accounts in the US …
… and by leveraging Munich Re’s international client base
1
Munich Re Group – Acquisition of The Hartford Steam Boiler Group – 22 December 2008
635
14
Based on US GAAP net written premiums as of 31 December 2007 as reported by HSB.
Acquisition rationale
Track record of outstanding financial performance
Superior underwriting performance
HSB combined ratio1
Superior underwriting results
%
HSB Combin ed Ratio
104.0
EB Ind ustry Co mbined Ratio
2
103.2
103.0
94.1
93.0
Average combined ratio of 73.8% since 2003 due to
highly specialized underwriting expertise
strong emphasis on preventative inspection
measures
benefits from very large database
HSB’s average combined ratio is 26% lower than the
EB Industry average combined ratio since 2003
Excellence in claims management
78.1
75.6
73.7
71.3
70.2
99% equipment breakdown claims in US settled
within one year of date reported
Supported by almost 50% of HSB’s employees who
are engineers and inspectors
Low reserve risk
Short-tail nature of business
80% of claims are recorded in the year of the
accident
2003
1
2
2004
2005
2006
2007
Based on consolidated statutory financial statements. Statutory combined ratio was lower than 78.1% for each year since 2003.
Equipment breakdown insurance market for North America as per A.M. Best (10 November 2008).
Munich Re Group – Acquisition of The Hartford Steam Boiler Group – 22 December 2008
4
15
Munich Re Group
Acquisition rationale
4
Track record of outstanding financial performance
Superior development of key financials
Continuously growing net income
US$ m
146
2005
2006
158
2004
2007
Note: Statutory net income.
Based on consolidated statutory financial statements.
Sustainable high quality profits
Robust capital position to be further enhanced
Consistently stable RoPHS (2003-2007 average of
21.6%) supported by
low correlation with natcat events
strong product knowledge and good risk management
superior underwriting skills and claims management
low reserve risk due to short-tail nature of business
Revenue synergies by delivering HSB proposition to
Munich Re client base
Strong and consistent earnings supported by excellent
underwriting results have contributed to a solid capital
base
Sound capital position of US$ 594m based on US GAAP
(unaudited) as at 30 Sept 2008; A rated by A.M. Best
Purchase price adjustment mechanism protects Munich
Re from further investment losses contributing to a
stable capitalization in line with 30 Sept 2008 levels
Sound capitalisation considered an increasingly
important factor from a market perspective
Solid cash flow expected
Note: RoPHS was higher than 18.5% for each year since 2003.
Based on consolidated statutory financial statements.
Munich Re Group – Acquisition of The Hartford Steam Boiler Group – 22 December 2008
108
97
2003
139
16
Acquisition rationale
Track record of outstanding financial performance
Future asset allocation to reflect a more conservative style
Investment portfolio mix (as at 30 September 2008)1
Status quo
Others
2%
No structured products or derivatives:
ABS/MBS (incl. subprime), CDO or CLO
Investments currently in publicly traded liquid
securities
Good quality of fixed-income investment
(73% rated A or better)
Bonds
55%
Common stocks
5%
Cash and
short-term
14%
Going forward
Preferred stocks
24%
Assets will be managed in accordance with
Munich Re’s ALM approach leading to an even
more conservative risk profile
HSB has already increased portfolio weighting
in fixed-income securities, considerably
reducing economic risk capital
Total investments: US$ 1.2bn
Munich Re protected from investment losses up to closing through purchase price
adjustment mechanism keeping capital in line with 30 September 2008 levels
1
Based on US GAAP carrying values as of 30 September 2008. Source: Company disclosure and filings.
Munich Re Group – Acquisition of The Hartford Steam Boiler Group – 22 December 2008
4
17
Munich Re Group
Agenda
Transaction highlights
Acquisition rationale
Transaction terms and financial impact
Summary
Munich Re Group – Acquisition of The Hartford Steam Boiler Group – 22 December 2008
Products and business model
18
Transaction terms and financial impact
Value consideration
Prudent valuation and thorough due diligence
Value considerations
Munich Re will acquire 100% of HSB’s outstanding and issued common share
Comprehensive and detailed due diligence process safeguards interests of Munich Re’s shareholders
Valuation based on conservative assumptions for future financial development including adequate
allowance for assumed recessionary impact
Transaction structure allows Munich Re to optimise tax effects through amortisation of goodwill
US$ 742m purchase price implies attractive multiples
price-to-book 1.25x1
price-to-after-tax operating earnings 4.5x2
US$ 742m purchase price includes the assumption of US$ 76m of outstanding HSB capital securities
Acquisition metrics compare favourably with current trading multiples3 and precedent transactions4
1 Based
on unaudited US GAAP shareholders equity as at 30 September 2008.
GAAP after-tax operating earnings in last 12 months from September 2008.
Without taking a strategic premium into account.
Precedent market transactions refer to specialty P-C companies.
2 US
3
4
Munich Re Group – Acquisition of The Hartford Steam Boiler Group – 22 December 2008
Acquisition fully funded from internal sources
19
Munich Re Group
Transaction terms and financial impact
Financial impact
HSB is EPS accretive and safeguards strong capital position
Impact on capital position
EPS accretive for Munich Re
shareholders in 2009 even without
realisation of synergies
Transaction does not impact Munich Re’s share
buy-back programme
Strong solvency ratios (regulatory, rating
agency and internal-model-based) unaffected
by acquisition
Synergy potential
Leverage client base in both directions:
Expanding HSB’s Client Company model by utilising Munich Re’s strong client base and leading
position in Europe
Extending HSB’s customer base by selling specialised Munich Re products
Significant potential to accelerate HSB’s international growth through Munich Re’s footprint
Retain greater share of reinsurance programme within Munich Re
Product development and product mix diversification: benefit to MARP1 from superior engineering
know-how and risk expertise
Cost synergies will be limited primarily to the assumption of back-office functions
Transaction not driven by
cost synergies
1
Prudently calculated revenue synergy
potential to be realised medium term
Munich Re Group – Acquisition of The Hartford Steam Boiler Group – 22 December 2008
Impact on EPS
20
Munich-American RiskPartners.
Transaction terms and financial impact
Post-merger integration
HSB to benefit from Munich Re’s ownership
Munich Re plans to maintain HSB’s successful business model, keep its highly reputed brand and retain
its management team
Back-office functions previously carried out by AIG will be assumed by Munich Re America
Adequate measures will be implemented to leverage cross-divisional synergies and align potential
business overlaps
Overall post-merger integration cost will be limited primarily to
the assumption of back-office functions
Munich Re Group – Acquisition of The Hartford Steam Boiler Group – 22 December 2008
HSB will operate as a subsidiary of Munich Re America
21
Munich Re Group
Agenda
Transaction highlights
Acquisition rationale
Transaction terms and financial impact
Summary
Munich Re Group – Acquisition of The Hartford Steam Boiler Group – 22 December 2008
Products and business model
22
Summary
HSB acquisition
Key takeaways
Summary
HSB is market leader in coverage of equipment breakdown and fits in
well with Munich Re’s culture of technical underwriting
HSB has a track record of outstanding financial performance
on a sustainable basis
Attractive valuation and terms based on thorough due diligence
to safeguard shareholders’ value
HSB contributes to future value creation through immediate earnings accretion
without impacting Munich Re’s share buy-back programme
Munich Re Group – Acquisition of The Hartford Steam Boiler Group – 22 December 2008
Expansion of specialty business fully in line
with our Changing Gear programme and US market strategy
23
Munich Re Group
Appendix
Shareholder information
3 March 2009
Balance sheet press conference for 2008 financial statements (preliminary figures)
Analysts' conference, Munich
22 April 2009
Annual General Meeting
23 April 2009
Dividend payment
6 May 2009
Interim report as at 31 March 2009
4 August 2009
Interim report as at 30 June 2009; Half-year press conference
5 November 2009
Interim report as at 30 September 2009
Munich Re Group – Acquisition of The Hartford Steam Boiler Group – 22 December 2008
Financial calendar
24
Appendix
Shareholder information
For information please contact
Christian Becker-Hussong
Ralf Kleinschroth
Christine Franziszi
Tel.: +49 (89) 38 91-45 59
E-mail: [email protected]
Tel.: +49 (89) 38 91-38 75
E-mail: [email protected]
Andreas Silberhorn
Martin Unterstrasser
Tel.: +49 (89) 38 91-33 66
E-mail: [email protected]
Tel.: +49 (89) 38 91-52 15
E-mail: [email protected]
Münchener Rückversicherungs-Gesellschaft
Königinstrasse 107, 80802 München, Germany
Fax: +49 (89) 38 91-98 88
E-mail: [email protected]
Internet: www.munichre.com
Munich Re Group – Acquisition of The Hartford Steam Boiler Group – 22 December 2008
Head of Investor & Rating Agency Relations
Tel.: +49 (89) 38 91-39 10
E-mail: [email protected]
25
Munich Re Group
Appendix
Shareholder information
Disclaimer
This presentation contains forward-looking statements that are based on current assumptions
and forecasts of the management of Munich Re. Known and unknown risks, uncertainties and
here and the actual development, in particular the results, financial situation and performance
of our Company. The Company assumes no liability to update these forward-looking
statements or to conform them to future events or developments.
The financial information contained in this presentation is based on statutory financial
information with respect to the financial performance of HSB except where it is based on US
GAAP as indicated. Disclosure of US GAAP financial information is restricted under the terms
of the non-disclosure agreement with AIG as US GAAP data for HSB has not been publicly
disclosed historically by AIG.
Munich Re Group – Acquisition of The Hartford Steam Boiler Group – 22 December 2008
other factors could lead to material differences between the forward-looking statements given
26